Is a Change to Income Tax Devolution in Wales on the Horizon?

An independent report, commissioned by the Welsh government, has examined potential future options for income tax devolution in Wales. It compares keeping the current partially devolved system with moving to full devolution, while factoring in the effects of the block grant adjustment (BGA).

The report, prepared by the Fraser of Allander Institute at the University of Strathclyde and Bangor University, explores four options and their effect on the net tax position of the Welsh government.

The four options are:

• Partial devolution of income tax rates with a BGA calculated on a ‘by-band’ basis. This is the current approach used in Wales.
• Partial devolution of income tax rates with a single BGA.
• Full devolution of income tax rates and thresholds, with a single BGA. This is the current approach in Scotland.
• Full devolution of income tax rates and thresholds, with the BGA calculated on a ‘by-band’ basis.

Currently, the UK government reduces each of its basic, higher and additional income tax rates by 10 percentage points for Welsh taxpayers. Since devolution, the Welsh government has set its own rates of income tax at 10%. This means that Welsh taxpayers pay the same overall amount of income tax as those in England and Northern Ireland.

What is the block grant adjustment (BGA)?

The BGA reduces the amount of grant that is paid by the UK government to the devolved administrations in Wales and Scotland. The reduction is intended to reflect the amount of revenue the UK government would have received in the absence of devolution.

The method by which the BGA is calculated can vary.

• In Wales, where the devolved income tax rates apply to each of the income tax rate bands, the adjustment is separately calculated for each tax band.
• In Scotland, there is a single adjustment to the grant.

The devolved administrations effectively gain (or lose) on the difference between the tax revenues they collect and the amount of BGA that is deducted from their grant. The report, therefore, looks at how sensitive this difference is for the Welsh government under the four options reviewed.

What does the report conclude?

In short, the authors conclude that there is no single optimal model among the four options that were looked at. Each has benefits and drawbacks.

Partially devolved systems offer less control but also reduce how much the Welsh government is exposed to changes outside its control.

Full control of income tax rates and bands would allow the Welsh government greater control over the tax system. However, the report highlights that income tax rates cannot be set in a vacuum.

The report recommends that a decision on changing income tax devolution in Wales would need to balance the government’s risk appetite against a realistic assessment of the possible negative outcomes. Potential changes in UK government policy and how Welsh income tax would interact with UK income tax would also need to be considered.

See: https://www.gov.wales/future-options-for-income-tax-devolution-in-wales